Unknowable

By: Rodney C. Cook | Sun, Jul 9, 2006
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The unknowable has arrived. This is evidenced by the certainty with which the pundits integrate the volatility of the financial markets into their worldview. But there is an increasing false bravado in discussions of the competency of our hallowed financial institutions. So Keynesians, desperate for a plan, cling to bankrupt concepts for generating and maintaining wealth. Concepts soon to be antiquated by nature's immutable laws. So can one short conviction? Well, those going long the VIX have done well in the past several weeks as it has bounced from historic lows. But speculation is not our game. The primary trend must be ascertained for long term investment and life style decisions. This has served us well.

The lines of probability continue to guide events. Recent volatility in gold is not inconsistent with a monthly data series of the past several years. The last few months of data do not significantly alter estimates of the long term rate of growth. The run up bumped the upper end of possible price scenarios, and most significantly the resulting lines of probability indicate that there will be no return to "new economy" processes. The rapid declines of the past few weeks do not cause use to reject this line of thinking, but rather to enforce it.

So liquidity is tight as the yen carry trade begins its long unwinding. Investors in the squeeze, expecting easy money relief from the fed, are trampling each other to position themselves under the helicopter doors. Instead they find the Bernanke Brigade brandishing the imperial jawbone like a crazed door gunners, blathering with abandon at any glints of inflation. But words offer little to those used to creating liquidity by front running the Fed. As they nurse their wounds they curse Brutal Ben, and question their station in life.

Behold the global command and control economy. We needn't bother making our own decisions any longer. I offer my humble gratitude for being relived of this burden. But I am not worthy. After all, growth will be balanced. Risks will be managed. Even my wealth will be managed with an acute sense of social responsibility. I am grateful to tax assessor for increasing my contribution by five fold these past five years. Even the local elites have social engineering to accomplish. And I fervently pray to mammon for forgiveness for ever doubting that our financial masters could ever fail to provide oil and commodities in abundance.

All of these scary peak oil and scarce commodity shows on TV are just the usual fear mongering by constituencies up to no good, mostly nasty price gougers in the resource sectors. The many rumors of funds with difficult circumstances are just that, rumors. Clearly the great pyramid of derivatives has remained well balanced on its all knowing eye. The rouge economic waves we have felt of late are not caused by deep dislocations in the sea of commerce. We are simply witness to the genius of risks spreading beneath the surface. Prices have been appropriately aligned once again. And of course, there has been just a modest redistribution of wealth for the greater good. Life is good at the greater Goldman Sachs.

But we can see how clearly risks have been quantified and structured for the generations to follow: Just look at the magnitude of the derivatives pyramid. So many claims against the future. Mortgages that will last for generations. I suppose for the many they have finally come for the children. I guess I expected more of a fight.

We have used this recent pullback in precious metals shares as an opportunity to begin repositioning our precious metals portfolio for increased volatility and increased potential. Even after this pull back, and after taking a few new positions our average share position is up 151%. The average annualized unrealized gain is 54% with an average holding period of 1199 days. Gold as insurance is at fire sale prices, and defensive bullion positions should be increased perhaps with a wee bit of palladium. (A precious metals update follows for subscribers.)

 


 

Author: Rodney C. Cook

Currently Rod is the founder and manager of Bull Trout Capital, a boutique investment company, and author of the FishWrapper, a private investment newsletter. Bull Trout Capital was founded to maximize returns based upon long cycle dynamics and Austrian economic principles. Dr. Cook uses internet based methodologies to identify sectors, strategies and shares that will most likely outperform at the current point in the cycle whilst maximizing upside exposure to potential economic dislocations. The FishWrapper features Dr. Cook's personal investments, methods and strategies where he has demonstrated extraordinary returns. Before Bull Trout he founded Sightward and authored patents (now owned by InfoUSA) to forecast human behavior on the internet; co-founded Ark Interface (now owned by xSides) to develop and patent innovative computer user interfaces; founded Optimas (now owned by Media Cybernetics) for medical and scientific image processing systems; and founded BioSonics Imaging division and developed their Optical Pattern Recognition System. Dr. Cook began his career as a Biometrician for the International Pacific Salmon Commission applying his doctoral dissertation in applied pattern recognition from the University of Washington College of Ocean and Fisheries Science.

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